Opportunity Zones

These zones were designated to spur economic growth in areas of the United States that were deemed to be economically distressed.

MBE CPAs / Resources / Opportunity Zones

Opportunity Zones

Opportunity Zones were created in IRC Section 1400Z as part of the Tax Cut Jobs Act that was signed into law on December 22, 2018. There are over 8,700 geographical areas that qualify (Opportunity Zones), some of which are located in the markets that MBE CPAs, LLP directly serves.

Tax Benefits
The three major tax benefits of Opportunity Zones:

  1. Defer: Capital gain deferral if the funds were reinvested in a Qualified Opportunity Fund – the original gain can be deferred until the earlier of the Qualified Opportunity Fund being sold or 12/31/2026.
  2. Reduce: Capital gains can be partially recognized if they are held for a period of more than 5, but less than 10 years.
    1. Opportunity Fund is held less than 5 years – the full amount of gain is recognized.
    2. Opportunity Fund is held 5-7 years – 90% of the capital gain is recognized.
    3. Opportunity Fund is held for 7-10 years – 85% of the capital gain is recognized.
  3. Eliminate: Elimination of capital gains if an opportunity fund is held for at least 10 years
Who Is Eligible?
Partnerships and Corporations are eligible to execute the tax advantages of section 1400Z

If a partnership or S Corporation meet all requirements of section 1400Z and elects to be treated as a Qualified Opportunity Fund, but does not elect to defer the gain at the entity level, the owners may still be able to elect to execute the tax advantages at the individual level.

Who Should Consider?
  • Those with significant gains that will be recognized upon the sale of non-Opportunity Zone Property. The funds can be reinvested in an Opportunity Fund within 180 days and the gains can temporarily be deferred.
  • Those considering the purchase of a new or existing business real estate or stock.
  • Those considering significant improvements to property located inside a qualified opportunity zone.
Definitions
Opportunity Zone: A tract of land, applied for by the state, certified by the Treasury, which has been identified as a geographical area in need of economic stimulation.

Opportunity Funds: Private investment vehicle used to purchase qualifying property to take advantage of the tax benefits of Section 1400Z. 90% of the opportunity fund’s assets must be invested in Opportunity Zones.

Opportunity Zone Property: Assets eligible under Section 1400Z.

  1. Qualified Opportunity Zone Stock – stock in a domestic corporation which is operating as a qualified opportunity zone business.
  2. Qualified Opportunity Zone Partnership Interest – domestic partnership interest which is operating as a qualified opportunity zone business.
  3. Qualified Opportunity Zone Business Property – real or tangible property used for business that meets the 90% asset test.
    90% Asset Test:
    • The Qualified Opportunity Fund must hold at least 90% of its assets in qualified opportunity zone eligible property.
    • The asset test is calculated at the middle and end of the year and the results are averaged.
    • There are specific rules for the first year an entity certifies as a Qualified Opportunity Fund.
    • There are also specific rules for how working capital is to be treated for the purposes of the asset test.
    • There may be penalties assessed if the 90% asset test is not met.
  4. Opportunity Zone Business: trade or business if they meet all of the following requirements:
    1. At least half of its gross income is from the active conduct of a trade or business
    2. The business uses a substantial part of its intangible property in conducting
    3. Less than 5% of the average unadjusted basis is from nonqualifying financial property
    4. The business is not part of the following ineligible activities list.
      • Golf Course
      • Country Club
      • Massage Parlor
      • Hot tub facility
      • Suntan facility
      • Racetrack
      • Facility used in gambling
      • Facility used primarily for the sale or consumption of alcohol
Automatic Election
The self-certification is completed via Form 8996 which must be filed with the tax return by the due date, including applicable extension, to certify that the entity was organized as a Qualified Opportunity Fund.

Wisconsin Maps

Maps Provided by: WHEDA